What is COGS (Cost of Goods Sold)?
Cost of Goods Sold, or COGS, is the sum of all direct costs incurred in the production of goods or services. This includes the cost of raw materials and components, direct labor and overhead costs. COGS is listed as an expense on a company’s income statement, directly after the sales revenue.
How is COGS Calculated?
An enterprise’s gross profit is calculated by subtracting the cost of goods sold from its sales revenue. Thus, COGS is key data that helps a business monitor its performance.
Why is COGS Important?
COGS is important for the following reasons:
- Helps determine the profitability of sales and products
- Measures efficiency in production and purchasing
- Helps set competitive pricing strategies
- Identifies areas to reduce costs and optimize operations
- Can signal issues like high material costs or excessive inventory
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